Hope for a rebound from Europe's economic 'winter' were dashed this morning as PMIs signaled a renewed downturn.
S&P Global EU PMI fell to a 5-month low of 50.3 (barely in expansion). The decrease in the composite index was broad-based across sectors but skewed towards services, although the services index, unlike the manufacturing output index, remains in expansionary territory.
The composition of the June report showed a broad-based moderation across new orders, employment, new export orders, and backlogs. Firms' future output expectations declined further as well.
This decline was led by France, which has been battered by strikes, though Germany’s struggling factories also played a role.
France: The French composite flash PMI decreased by 3.8pt to 47.3, below consensus expectations. The composite decline was broad-based across sectors but skewed heavily towards services, which fell into contractionary territory after four consecutive months of above-50 postings.
Germany: The German composite flash PMI decreased by 3.1pt to 50.8, also below consensus expectations. The decline in the composite index was broad-based across sectors, although unlike the manufacturing output index, the services index remained in expansionary territory.
Periphery: The periphery composite PMI decreased by 1.1pt to 51.7. As in Germany, the composite decline was broad-based across sectors, although the services index remains in expansionary territory, while manufacturing output contracted further.
Additionally, in the UK, the composite flash PMI decreased by 1.2pt to 52.8, also below consensus expectations, driven by a moderation in services.
This should not be a huge surprise given the non-stop plunge (serial disappointment) in European macro data in Q2...
Source: Bloomberg
Note the US data is improving modestly in recent weeks as Europe collapses - juxtaposed with The Fed 'pause' but hawkish ECB.
“Even if our baseline scenario of slightly positive euro-zone growth in the second quarter still becomes reality, the downward trend in the Composite PMI points to a difficult second half of the year as companies across all sectors face deteriorating order books,” Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said in a statement.
Manufacturing remained the “principal area of weakness” in June, though service-sector expansion “slowed sharply” as the recent bounce-back in spending lost momentum.
The disappointing data on the activity front were, however, accompanied by a “marked cooling of inflationary pressures,” according to S&P. It said input costs grew at the slowest pace since December 2020 and selling prices for goods and services rose at the weakest rate since March 2021.
That will offer some hope to the ECB, but:
“If the ECB only had to control goods prices, then Frankfurt would toast the end of inflation,” de la Rubia said.
But “in the more important part of the economy, the private services sector, prices continue to rise, and that’s why the core rate of inflation has been so slow to decline.”
So, time for more rate-hikes in Europe and UK? ECB rate-hike expectations for Sept fell very modestly on the data
The euro tumbled on the data but is coming back a little as US opens...
Perhaps most notable from all the PMI data is that, as Goldman notes, following months of increasing divergence between the services and manufacturing sectors, whereby strong momentum in the services sector compensated for weakness in the manufacturing sector, aggregate growth momentum now appears to be moderating more meaningfully on the back of a slowing in the services sector as well.
A lesson from over-confident American investors and policymakers ahead of their PMIs perhaps - one side of the economy cannot act independently of the other for long, they are cylically-linked, not independent.
